What explains the huge rally in Zen Technologies stock?

On 20th August 2021, the stock of Zen Technologies was trading at Rs.79 per share. Less than a month later, the stock is trading at Rs.193, giving returns of 144% in less than a month. What is surprising about this sudden rally is that over the last five years, the stock of Zen Technologies did nothing. In fact, if you look at 5-year returns of Zen, it is at the same level of price appreciation as in the last 1 month. What changed for the stock?

The rally in the Zen Technologies stock began with the company receiving a huge Rs.155 crore order from the Indian Air Force for the supply of Counter Unmanned Aircraft Systems (CUAS). Zen specializes in the manufacture of drones and anti-drone systems as well as drone support systems. The Rs.155 crore order was the largest single order that Zen Technologies had received. That was also the time when Zen revealed its outstanding order book position at Rs.402 crore.

However, the big gamechanger for the government hinting at combining the drone PLI scheme with the auto PLI scheme. When the government announced the automobile performance linked incentive (PLI) scheme, it also included Rs.120 crore allocation for incentives to drones. This was a gamechanger as the incentive amount was bigger than the total revenues of drone companies combined. 

However, the government expects the drone revenues to grow from Rs.60 crore currently to Rs.900 crore in the next 3 years on the strength of the PLI scheme for drones. The PLI scheme will cover manufacture of drones, drone components and anti-drone systems. Since Zen Technologies is present in all the three segments, it is expected to be a big beneficiary of the Drone PLI scheme. 

The incentives for drones will be 20% of the value addition, which is likely to add to revenues and margins of Zen Technologies substantially. That seems to have clearly enthused the stock.